How an Economy Grows and Why It Crashes

31
T H E   M A N Y   U S E S   O F   C R E D I T
“Hey, Rocke-fi sher,” griped Baker. “Maybe you should take 
a break from fi sh counting and lend me and my pal Charlie 
a couple of fi sh so we can kick back a day or two. You’re 
not the only one who deserves a life of leisure. And besides, 
we’ll pay you back.”
“Believe me, I know that fi shing can get to be a drag,” 
responded Able. “But remember, if I lend you one fi sh, I’ll still 
want two fi sh in return to compensate me for the risk.” 
W
henever an outside force, such as government, encour-
ages or demands that savers make loans for reasons 
that may have nothing to do with the actual likelihood of 
repayment, higher degrees of loss are almost inevitable. Such 
distortions waste society’s savings.
In their zeal to do something good, governments like to 
infl uence the way savings are lent out. They pass laws that 
make some types of loans more appealing than others.  But 
government has no savings; only individuals do! If, as a result 
of government incentives, the loans go to individuals or busi-
nesses that fail to pay off (and they often do), then the loss 
falls to those individuals who have sacrifi cially under con-
sumed to create savings!
In fact, Able would be much less inclined to lend in the fi rst place 
if he were forced to make loans that he felt were excessively 
risky, such as in the case of fi sh hypnosis. As a result, he may 
decide not to work as hard, or not to sacrifi ce as much to save!
REALITY CHECK

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